GCC inks currency union draft

Jeddah, September 17, 2008

Gulf Arab finance ministers approved on Wednesday the framework for their monetary union but left questions over the timing of the launch of the single currency at the heart of the project unanswered.

The ministers ended their milestone-setting talks in Jeddah amid doubts over the independence of a future common central bank, and they deferred a decision over its location to a summit of the six Gulf Cooperation Council heads of state in November.

'We have an agreement on the accord to set up the monetary union and the monetary council as well as the basic structure,' Qatari Finance Minister Youssef Kamal, who chaired the meeting, told reporters.

'We have asked the central bankers to complete the requirements for the single currency in future meetings.' Asked if the single currency was likely to be launched by the 2010 deadline declared when monetary union plans were launched in 2001, Kamal said: 'I don't know'.

While oil-fuelled economic growth appears to have shielded Gulf Arab states from the worst fallout of the US financial crisis, there is a growing recognition that speeding up monetary reforms will help bolster them against future volatility.

Gulf central bank governors said on Tuesday they saw little systematic risk from the US financial crisis as their exposure to troubled US banks and sub-prime assets was limited.

But IMF director general Dominique Strauss-Kahn, who joined the meeting on Wednesday, said the worst of the financial crisis may still lie ahead and could weigh on the world economy.

Strauss-Kahn spoke the day after US authorities engineered an $85 billion rescue of insurance giant American International Group, staving off bankruptcy and bringing a measure of calm to shell-shocked global markets.

The bailout came just two days after US authorities refused to rescue investment bank Lehman Brothers. 'We are beginning to see that if we don't agree on these issues, future storms may be more difficult to deal with,' Kamal said.

The pact approved on Wednesday includes an agreement on the charter governing a monetary council that will form the nucleus of a future central bank. But the ministers appeared to be undecided over how much independence the planned joint monetary authority would have. 'It is still not decided now,' Qatar Central Bank Governor Sheikh Abdullah bin Saud Al-Thani told reporters when asked.

The unified monetary authority cannot be established until the five countries taking part in the monetary union have all ratified the agreement.

A suggestion that the number of necessary ratifications be reduced to three, in an effort to speed up the process, was rejected by finance ministers, a senior Gulf official said.

The GCC launched its monetary union plans in 2001 but setbacks have since dogged the project. Inflation has been a key challenge as Gulf states struggle to meet convergence criteria while battling soaring prices.

Most Gulf states have fixed their currencies to the dollar, forcing them to track US rate cuts even as their economies boom. Oman has already dropped out of the monetary union project and Kuwait threw the plan into doubt when it dropped its dollar peg to free it up to battle soaring prices.

But Qatar and Oman both said they saw signs of easing inflation in the coming months as oil prices fall off this year's record highs and the dollar recovers. Annual inflation in Oman eased to 13.35 percent in July, official statistics showed on Wednesday, and Oman's central bank governor said he expected it to sink below 10 percent next year. - Reuters